Learning lessons from the days of bread lines and pencil selling

Although I studied the Great Depression as an economics major in the 1960s, its dread faded.

I even underrated the relevancy of Federal Reserve Chairman Ben Bernanke's expertise on the Great Depression. I was WRONG! Even worse, many economists shared my error.

In his Jan. 5 New York Times column, "Fighting off Depression," Nobel laureate Paul Krugman noted such blind spots. Krugman wrote, "In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the 'central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.'"

2008's catastrophic events stirred up remembrances of my relatives and their suffering during the Great Depression. They recounted their experience in the same hushed tones of ghost-story tellers.

My mother related that my grandmother sold pencils door to door to supplement the paltry income of my grandfather. A close family friend jumped from a skyscraper. He had not confided to his wife about his losing a job because of embarrassment and shame.

My aunt and uncle lived on paper script provided by their employer because the local bank had failed, wiping out the community's savings.

The scars of the Depression lasted a lifetime. Survivors distrusted banks and hated indebtedness even more. Long after the Depression ended, my two uncles and an aunt bought homes using all cash. They had saved patiently for years rather than depend upon a mortgage.

In popular jargon, a recession is when your neighbor loses his job. A depression is when you lose your job.

Economists define a recession as two consecutive quarters of falling gross domestic product, which is the value of goods and services produced in the nation. Depression reflects a decline in the value of goods and services by 10 percent or negative growth for three years.

America from 1929 to 1939 endured two major depressions. The GDP fell 30 percent between 1929 and 1933 and 13 percent during 1937 and 1938. Unemployment averaged about 18 percent from 1929 to 1939.

For American capitalism to survive, Franklin Roosevelt orchestrated a New Deal that sought to:

reduce unemployment

assist businesses and agriculture

regulate banking and the stock market

provide security for the needy, elderly and disabled.

The Great Depression permanently altered the American mindset to accepting government involvement and responsibility in caring for society's most needy members and regulating many aspects of the economy.

New Deal programs sought to lower the supply of goods to meet the depressed level of consumption that accompanied widespread unemployment. However, "the nine old men" of the Supreme Court subsequently ruled these two of these acts unconstitutional:

In 1935, the National Industrial Recovery Act, which created codes that regulated competition while guaranteeing minimum wages and maximum hours for workers.

In 1936, the Agricultural Adjustment Act, which sought to raise farm prices by paying farmers not to grow surplus crops.

Conversely, the New Deal increased buying power by hiring thousands of workers who built schools, dams and roads. For instance, the Tennessee Valley Authority provided electric power and flood relief that uplifted the standard of living of millions of Americans.

But the New Deal had blemishes. Much of its legislation was discarded by subsequent administrations. In 1937, the government mistakenly reduced expenditures and the Federal Reserve tightened monetary policy, causing a short depression.

FDR instead should have followed the policy prescriptions of economist John Keynes, who advocated massive deficit spending. Keynes recognized that traditional tools such as lowering interest rates were ineffective when society suffered from insufficient demand.

That is, consumers concerned about unemployment and businesses burdened by excessive inventories were unwilling to spend. This crisis of confidence led to a vicious cycle that undermined the gross national product.

Alternatively, fearful commercial bankers would not lend, fearing a "run on the bank." Keynes facetiously advocated paying workers to dig holes and then refill them to stimulate demand.

America belatedly recognized the merits of Keynes' policy cure during World War II. From 1945 until the early 1960s, Keynesian economics dominated policymaking in capitalist societies.

However, the popularity of massive spending waned after it contributed to high inflation rates.

Recently, I tried purchasing my old economics textbook about the Great Depression. The $140 price tag sent me back to the poor house.

Brother, I need a lot more than a dime!

Next week, I will discuss the current economic crisis, including its causes, the case for and against our monetary policy, the case for and against our fiscal policy, and the long-term impact of our massive increase in federal debt.